The federal government has enacted a controversial digital services tax that could raise billions of dollars by taxing the profits international companies make in Canada, but also threaten Canada’s trade relationships.
The Liberal government proposed the tax in its 2019 election manifesto, and later agreed to delay implementation of the measure until the end of 2023 in the hope of reaching an agreement with other OECD countries on how to tax multinational digital companies.
Negotiations for the international agreement continued, and the federal government Order of the Council A bill to enact a Digital Services Tax (DST) was submitted on June 28 and received royal assent on June 20.
Finance Minister Chrystia Freeland is defending a controversial new tax on foreign tech giants like Netflix, Google and Amazon. She says the tax would raise billions of dollars in revenue, but experts say consumers will end up paying more.
“Canada has always been, and will continue to be, a preferred multilateral solution,” Deputy Prime Minister and Finance Minister Chrystia Freeland told reporters in Milton, Ontario, on Thursday.
“It is simply unreasonable and unfair for Canada to indefinitely suspend its measures,” she said. “Many other countries currently have DST and have done so for years without retaliatory action. [from the U.S.]”
Freeland said if allies such as the UK, Spain, Italy and France can implement DST without facing retaliation from the US, Canada should be able to do so too.
“We have been and continue to work hard to achieve a multilateral solution,” she said, “and I am absolutely confident that a win-win outcome for Canada and the United States is absolutely possible.”
Digital companies with annual worldwide revenues of $1.1 billion or more would be subject to a 3% tax on any annual Canadian revenues over $20 million. The first year of the tax would include revenues earned on or after Jan. 1, 2022.
The Congressional Budget Office estimated last year that the tax would raise more than $7 billion over five years, and the fiscal 2024 budget projects it would raise $5.9 billion over five years, starting in 2024-25.
Multinational digital companies such as Meta, Alphabet, Facebook and Amazon are not based in many of the countries in which they operate, allowing them to avoid paying certain taxes.
The federal government sees the digital services tax as a way to modernize tax laws and allow companies located overseas to capture revenue they earn in Canada.
“Canada strongly supports international efforts to end the race to lower corporate taxes and ensure that all companies, including the world’s largest, pay their fair share,” Freeland’s spokesperson Katherine Kupplinskas told CBC News.
US envoy claims tax system is ‘discriminatory’
The Liberal government’s decision to impose the tax before an international agreement with other OECD countries is in place has raised concerns about potential negative effects.
U.S. Ambassador to Canada David Cohen issued a statement Thursday calling the tax “discriminatory.”
“[The United States Trade Representative] We express our concerns about Canada’s digital services tax and stand ready to evaluate and use all available avenues that could bring about meaningful progress towards resolving this unilateral and discriminatory tax. [digital services taxes]” Cohen said in a statement.
An Amazon spokesperson told CBC News on Thursday that the company is disappointed with the decision, calling it a “discriminatory tax that harms Canadian consumers.”
Shortly after the enabling legislation for the tax was passed, the U.S. Chamber of Commerce and the American Chamber of Commerce in Canada issued statements strongly opposing the measure, saying it would raise prices for everyone.
They argued that a digital services tax would unfairly hurt U.S. companies, harm digital exports to Canada and violate Canada’s obligations under the U.S.-Canada-Mexico Free Trade Agreement and the World Trade Organization.
“At this highly sensitive time in Canada-U.S. trade relations, we urge the Canadian government to reconsider this unilateral and discriminatory new tax,” the statement said.
Ontario government opposition
The Canadian Chamber of Commerce told CBC News on Thursday that a “retroactive and discriminatory digital services tax” would damage Canada-U.S. relations and raise the cost of living in Canada.
“The Canadian government should reverse its unilateral decision that is out of step with our allies and work with our trading partners to find an international solution that is better for Canadians,” Robin Guy, the chamber’s vice-president of government relations, told CBC News.
On June 28, Ontario Finance Minister Peter Bethlenfalvy wrote to Freeland asking her to suspend implementation of the tax.
“Canada, like other countries around the world, is taking steps to address tax fairness issues arising from the digital transformation of the global economy.” Bethlenfalvy wrote:
“But we must do so carefully and without imposing unnecessary taxes on our people and businesses or risk isolating Canada from the U.S. market.”
Bethlenfalvy’s office told CBC News on Thursday it was “disappointed” with the decision to impose the tax before an international agreement has been reached.
The American Computer and Communications Industry Association, which represents major tech companies including Amazon, Apple and Uber, sent a letter to U.S. President Joe Biden last month urging the administration to launch a formal dispute resolution process under the United States-Mexico-Canada Agreement (USMCA).
The group said the measure is necessary because a digital services tax could cost U.S. companies up to $2.3 billion a year and lead to the loss of thousands of full-time American jobs.
